Optimal mental this altitude I can run flat out for a half mile before my hands start shaking another downside of walking distance living tissue over a metal endoskeleton.
This episode is brought to you by LinkedIn jobs. Now more than ever businesses are grappling with incredibly challenging times a lot of things in life and business are changing and we're all adapting to new priorities while it does take time to adjust LinkedIn believes that it's also possible to find and create opportunities in times of turbulence in times of change whether you're looking to hire now for a critical role or thinking about needs that you might have in the future LinkedIn jobs can help LinkedIn is an active Community with more than six hundred and seventy five.
Million members worldwide LinkedIn screens candidates for the hard and soft skills you're looking for while putting your job in front of candidates looking for job opportunities that match exactly what you have to offer with LinkedIn. You can hire the right person quickly when you need them and if you need to hire for health care or essential Services, you can post your jobs for free right now when it's time to find and hire that right person LinkedIn is here to help just visit linkedin.com, Tim again, that's linkedin.com
Mom Tim to post a job now terms and conditions apply.
This episode is brought to you by five pull it Friday my very own email newsletter. It's become one of the most popular email newsletters in the world with millions of subscribers and it's super super simple. It does not clog up your inbox every Friday. I send out five bullet points super short of the coolest things. I've found that week which sometimes includes apps books documentaries supplements gadgets new self experiments hacks tricks and all sorts of weird stuff that I dig up from around the world you guys podcast listeners.
And book readers have asked me for something short and action-packed for a very long time because after all the podcast the books they can be quite long and that's why I created Five bullet Friday. It's become one of my favorite things. I do every week. It's free. It's always going to be free and you can learn more at Tim dot blog forward slash Friday. That's Tim dot blog forward slash Friday. I get asked a lot How I Meet guests for the podcast some of the most amazing people I've ever interacted with and little known fact, I've
Met probably 25% of them because they first subscribe to 500 Friday. So you'll be in good company. It's a lot of fun five bullet. Friday is only available if you subscribe via email, I do not publish the content on the blog or anywhere else. Also if I'm doing small in-person meetups offering Early Access to startups beta testing special deals or anything else. That's very limited. I share it first with 500 Friday subscribers. So check it out Tim dot blog forward slash Friday if you listen to this podcast, very light.
The that you'd dig it a lot and you can of course easily subscribe any time so easy peasy. Again. That's Tim blog forward slash Friday and thanks for checking it out if the spirit moves you.
Hello boys and girls, ladies and germs, this is Tim Ferriss and welcome to another episode of the Tim Ferriss show where it is my job to interview people who are world-class performers in their respective fields. And today. My guest is Howard marks at Howard marks book on Twitter Howard is co chairman and co-founder of Oaktree Capital Management a leading investment firm with more than one hundred twenty-five billion in assets under management. He is the author of the books mastering the market cycle subtitle getting the odds on your side.
and the most important thing subtitle Uncommon Sense for the thoughtful investor both critically acclaimed bestsellers, Warren Buffett has written of Howard marks quote when I see memos from Howard marks in my mail there the first thing I open and read I always learn something so he has some very bright Minds who pay attention to his writing and Howard has been on the podcast before this is round 2, and we dig into all sorts of subjects including the US dollar as a reserve currency investing how to
add defense to investment strategy three different ways to do that and much more. So without further Ado, please enjoy a wide-ranging conversation with Howard marks.
Howard welcome back to the
show. Thank you very much Tim. It's a pleasure to be
here. It's nice to hear your voice again and of all the people I could speak to on the show during these most exciting times and difficult times for many people. You are very much at the top of the list and there are a lot of different topics and a lot of different questions that I'd like to cover but I thought we could start have a number of your memos.
Front of me and there's one called you bet. This is from January 13 2020 and I thought we could start with the story of arriving at First National City Bank in May of 68 and how that contrasted with what you then did in 1978 it would you mind telling that story for people listening?
Know if you have some time.
I do have all the time in the world. It'll
take a while. Well, as you say I arrived at Citibank for a summer job in the investment research Department in May of 1968 between years of graduate school at the University of Chicago and I was assigned to the investment research Department.
The bank and most of the money center banks at the time in their money management departments were adherents of what was called nifty 50 investing and they invested in what they considered to be the 50 best and fastest growing companies in America.
extremely high-quality companies
Where nothing could go wrong?
and you know the the the idea of growth Stock Investing investing in companies because their earnings grew rapidly had been born in the early 1960s and these companies epitomized that activity IBM Xerox Kodak Polaroid Merck Willie Hewlett-Packard perkinelmer Texas
from its Avon Coca-Cola AIG Etc and
You know, the basic idea was you hit yourself to a company with the bright future and rapidly growing earnings. And if you if you did so the day I got there in 1968 and if you held those stocks firmly for the next five years, you lost almost all your money in the best company in the best companies in America because one thing had been
walked in the process
Which was price?
And nobody talked about the fairness or attractiveness of the price. The belief was that these are companies which were so good that it didn't matter what you paid. And if you pay the price that was a bit High the earnings would grow so fast that kind of the stock would grow into the price and so of course this was painful education.
These stocks generally speaking fell from price-earnings ratios of perhaps 80 which even today would be practically unheard of to 8 when the wheels came off the market in the early 1970s. Now some of it some of it was the collapse of the market some of it was the collapse of these this particular field of investing and some was that function of the flowering of rapid.
Station which was perplexing the country at that time. But but for whatever reason here you are you're investing in the best companies in America and you lose 80 or 90% you money now fast forward as you suggest him the 1978 in part because my meanderings with equities had worked out so badly as part of the Machinery that that ran this nifty 50.
The effort I left the investment research Department always have lucky. I didn't get fired and my boss asked me to join the bond Department, which was at that time a Backwater of investing and start a fund that would invest in convertible bonds, which was something that very few people had ever heard of and I started to do that and I loved it. So I went from being head of the Department of
75 people with a five million dollar budget and membership on all the bank senior investment committees to working alone with no colleagues no budget no committees and I was ecstatic because rather than no two sentences on 400 companies. I could know everything about a few. So I Love Money Management and I love the fact that I was operating in and uncrowded area.
And then in August of 1978, I got the call to change my life that head of the bond Department called up and said, you know, there's a guy named milk in or something out in California and he deals with something called high yield bonds. Do you think you could figure out what that is? Because the clients had asked for a high-yield bond portfolio. So I researched high-yield bonds. I met with Mike Milken. I started Citibanks high-yield bond fund late in 1978. I believe that was the first High.
Bond fund from the mainstream financial institution. And that was the very beginning of the high-yield bond world and one of the great lessons, of course as Malcolm Gladwell makes clear in his book outliers is that it's great to be first in line.
And the timing accident of my being assigned to the bond Department in 1978 put me at the beginning of the line in high yield bonds and high yield bonds are the bonds of companies which are not rated investment grade. They're considered speculative grade by the rating agencies at the time. They were verboten by the vast majority of investors. And so I went from invested in what everybody loved.
To what everybody hated?
From the best companies in America to the worst public companies in America, and now I'm making money safely and steadily in the worst companies in America because they were so cheap because the interest rates they had to pay in order to secure financing as as a disrespected group was excessive under the circumstances.
So this was quite an epiphany and it has really directed my whole
career.
And you've written in this particular memo success in gambling doesn't go to those who pick winners but to those with the ability to identify Superior propositions. The goal is to find situations where the odds are generous to one side or the other with their favorite or Underdog in other words a mispricing and you explore this in the context of different types of games some games of chance some games that have different profiles and you
Can categorize them are you have let's just say no hidden information no luck and skill chess no hidden information luck and skill backgammon. No hidden information Lucknow skill roulette hidden information luck. Skill Blackjack and poker and you have quite a history with many different types of games and you I think are very good at thinking about the future probabilistically framing good questions, if
Were to look at our current circumstances as a game and perhaps compare it to 2008. What are the games that were looking
at? Well, it's a it's a very interesting set of circumstances we find ourselves in because nobody knows anything about the future there's you know in the fields that I'm involved in economics and investing primarily. There is no such thing as knowledge of the future.
Because the future does not operate according to a fixed schedule or the laws of nature like physics and so forth. All we have is extrapolation from past patterns, which helped us in terms of our expectations for the future.
problem we have now is that there is no history for what we are engaged in first of all we have
I would say the worst Public Health crisis to come to America and over a hundred years or certainly one of the worst the worst economy since the Great Depression more than 80 years old.
the worst collapse of oil in history
And the greatest rescue on stimulus program from the fed and the treasury in history. So we have four things going on which are unprecedented and as a result. We really can't say what lies ahead in any of them?
And it is further Complicated by the fact that they also interact and we can't know how they will interact and what that will produce so I would say that we are unusually ignorant with regard to the Future today. And you know, one of the things I said to one of my colleagues Tim is that we all have the same information about the present and we all had the same.
But that future and today I think that ignorance is greater than at other times. So we have to to use the the outline you were posing. There's a lot of hidden information.
We don't even know how many people really have it. We don't know how many people have died from it because there are unreported cases of infection and there are deaths that took place that were not known to be the result of infection. So we have we have hidden information and we have so much about the future that we don't know, you know, will the will disease turn down will the the effect of warm
there be a positive when will it end in a logical test be developed and a vaccine if we reopen business will the cases that strike up again and so forth and to what extent so we are really dealing with a lot of ignorance and a lot of uncertainty and yet we have to
take action in positioning our capital for the future.
When the future is unusually
unpredictable and how do you how are you currently thinking in bets to use the title of the any Duke book that I know you are a fan of were perhaps it's not the best way to address the question really but given the uncertainties given the situation. How are you trying to navigate that or what?
Questions you finding most helpful.
Sure. Well, I think a lot of it goes back to him to what you said about the memo you bet is that it has to do with the quality of the proposition. I wrote a book. We talked about it a year and a half ago called mastering the market cycle and I thought that it's hot a subtitle that book was unusually helpful. The subtitle is getting the odds on your
Side when you're dealing with the future given the ignorance you can never have certainty. There's nothing that's sure to work or share to fail you only have probabilities. But sometimes the probabilities are very favorable to the investor and sometimes they are very unfavorable to the investor. And the whole thing about studying Cycles is trying to figure out which is which so let's let's talk
That propositions and let's talk about picking winners.
So you go to a horse race and there's one horse that stands out among all the others it great lineage looks terrific.
Great recent record and this horse is by far the favorite.
And everybody concludes that this horse will win the race. Does that mean that you should bet on this horse? That's really the key question in investing and the answer is it depends on the odds?
Because when one horse is an overwhelming favorite.
You may have to bet five dollars to win a dollar.
He's so sure to win but no nobody wants to bet against him. And if you want to join the hordes who want to bet on that horse, as I say you may have to put up five bucks to get back six. There may be a long shot in that race that somebody can figure out well, maybe that horse is going to have his day and that horse may be a ten-to-one shot or a fifty to one shot because we're so sure the favorable wind that the that is this long shot.
Is absolutely unpredicted to when nobody wants to bet on this or so. If you will get on this horse and you put up a dollar you can get 50 if you're right. So even though the horse is unlikely to win. It may be the better bet even though the favorite is overwhelmingly like it when it may be a bad bad. So it's not only what you think will happen, but it's also the payoffs. So let's take that through what we were just discussing.
He ate the the nifty 50 companies were believed to be great companies with a bright future and let's assume that their future success was assured. You still have to look at the proposition and the answer is that it costs so much to bet on those companies that betting on what were believed to be good companies turned out to be bad bets.
1978 high-yield bonds now we're betting on what are believed to be bad companies. But because their beliefs would be bad company's the payoff is extremely generous.
NADA not expected to be favorites but highly remunerative if they pay off so high yield Bond investing was very successful. Now you come into the into the pricing and life gets tough. But you know, we have to make some judgments about the future and the judge you have to you have to say how bad will it get now how
Quickly will we go back to work? What will be the experience when we go back to work? Will there really be a rebound in cases? How quickly will the economy come back to life? What will GNP do in the second quarter of this year, which is roundly believed to be the worst recession quarter in history and how fast will we get back to the 2019 levels of economic?
Activity and surpassed them. When will we have the vaccine all the you know, there there are dozens of questions and no answers. I've been quoting a Mark that Stitch who's a epidemiologist at Harvard who says that when in studying the virus they were there are facts. There are inferences based on analogies to other viruses and there are opinions.
And when we started off in this round, there were no facts the highly-skilled epidemiologist could make inferences and the rest of us were left to just guess but you know, there's there's some consensus developing which is the, you know, the country will go back to work in the next few months.
clearly no agreement on the pace that there will be there likely to be a rebound in new cases, but not as bad as the first and that gradually the economy will recover and it'll show much better 2021 than 2020 2021 may or may not be back to the 2019 levels, but
20:22 will be back to or surpass the 2019 levels and with vaccines and treatments the coronavirus will be demoted to just another seasonal disease. That's the consensus and of course the consensus opinion is reflected in the bidding for stocks and in the prices of stocks and other Securities, and that's where we are.
ER now and you know that so that's I would say I would describe that as a fairly positive forward-looking case and it's Incorporated in the prices of stocks and the prices of stocks are surprisingly High some of them or if you look at the averages which are dominated by, you know, the great companies like Amazon or Microsoft those averages like the S&P 500 are surprisingly High.
Of to where they were on February 19th, which was the all-time high and we're probably down, you know low double digits of percent 12 13 14 percent depending on the date you are this and so, you know the way I've described it. I would say not a bad outcome not a bad future and
so stocks have recovered very substantially from their lows. They are up 27% by things when they're lows because the consensus has settled on this good news. Now the now let's talk for a minute if I can go on about proposition.
The challenge today is that if the favorable unfolds and twenty Twenty-One or twenty-two are healthy economically vs. 19. Nobody thinks the stock market has that far to go on the upside.
And if the negative case unfolds and everything, I've said so promising really fails to materialize or materializes less and later than poked. There are pessimists and think that market has far to fall and hard to choose between the optimistic and the pessimistic case. So the odds were buying here.
The S&P 500 for example do not seem to me to be tilted heavily in the investors favor
the you have been thinking about uncertainty for a very very long time you for instance first read a book in 1963 title decisions under uncertainty subtitle drilling Decisions by oil and gas operators by see Jax and Grayson jr. And you've you've
proven inability to act on a spectrum of uncertainty over the subsequent decades and I think the way that you phrase questions is part of that questions to yourself questions among your team and I just wanted to give an example of that from your most recent memo this is knowledge of the future and it's it's a paragraph that's
seing the word Limitless which was used I think in quoting fed chairman or some someone of that type and here's the the wording is the program really Limitless and is that okay the stimulus loans bailouts benefits and bond buying that have been announced thus far out up to several trillion dollars what are the implications of the resultant additions to the federal deficit in the fed's balance sheet here's the part that I want to highlight just because I think it's a useful I think it's a useful framework
For looking at a lot of these a lot of these elements. Okay. So here we go to be facetious the government could send every American a check for 1 million at a cost of 330 trillion. Would there be any negative consequences from doing this such as burgeoning inflation a downgrade of Us credit worthiness or the dollar losing its status as the world's Reserve currency if the answer is yes, is there a point below 300 30 trillion at which those ramifications might kick in and if so, where could we be there already I'd be
Very curious to hear how you've attempted to answer or think about any of those things that were mentioned in that paragraph. We could pick one certainly if it's helpful such as the US dollar is the status of the dollar as a reserve currency in in these wildly unusual times, but how have you continued to think about those questions or attempt to tackle some of those unknowns?
Well, this is the $64 question these days.
And I want to make it clear before I try to do so that I'm not saying the FED is wrong to do what it's doing. The FED is throwing everything in the kitchen sink at the problem. And the problem has to be has to be solved, you know back if if I go back to March. Let's say 18 or 19. I think it was, you know, I was actively considering the possibility.
With my partner Bruce karsh of a global depression.
Comparable to the 1930s and you recall that we had we had a decade with unemployment in excess of 14% in the UF and a total absence of growth and widespread suffering and you know, we were talking about the possibility of that as this economy contracted imploded. So the fed and the treasury came along they threw everything at it they use
All the Lessons Learned in the global financial crisis of the 809 things that were developed over the course of month at that time. We're implementing weeks this time and certainly, you know, I think it was the New York Times describing jpowel statement as saying that the resources thrown at the problem would be Limitless and I think that's the right thing.
The alternative, you know back in the 30s. They were judicious in trying to fight the depression almost a steer and as a result a decade of suffering a generation truly scarred and you know arguably we only got out of the depression because the arrival of World War Two we don't want to wait for that as a Curative. So I say strongly that the
The fed and treasury were right in doing what they did. But the fact that there may be negative unintended consequence doesn't mean that they weren't right. But you know again we're battling problems. We've never seen before.
With weapons we've never seen before and we certainly can't say that they don't have negative potential unintended consequences. We just we don't know what they are. We will we would probably bear them nevertheless. But for example, if the government floods prints money the normal reflex reaction is to say
they print a lot of money that causes the currency to be valued and that that that is a lockstep relationship that has always been considered now in the last, you know, we've been running big deficits for a long time and extremely big deficits in recent years and yet we don't have
Serious inflation which is the normal sign of other currency being debased if the currency is to being debased and people think less of it and then if they if you want to buy a goat, you have to pay more dollars to get the goat or a car or a bar of gold or whatever and for you know, bunch of bananas and in recent years, we haven't had inflation.
Even though we've been running huge deficits has vastly increasing the national debt and so forth. So, you know economics is not a mechanical process which works according to a schematic in a Dependable fashion and all the printing of money that has taken place in recent years has not brought on inflation inflation is supposed to work in response to the unemployment rate.
Less unemployment there is in the country the higher the inflation is supposed to be because there's less slack in the economy and the workers for example can demand higher wages hasn't happened. That was this is just something called the Phillips curve and it's been touted for 60 years and just doesn't work. So we don't know but you know, that's why I use that extreme and I say said in the memo facetious example if the government sent
Buddy a check for a million dollars and it caught three hundred thirty trillion. Would there be an effect on the value of the dollar on inflation Etc? And you have to believe there would well, I have to believe it would but where does the negative effect cut in short of that?
Since we're not going to do that, but you know, the government is probably spending on buying Securities and pumping into the economy, you know close to 10 trillion this year. Is that enough to cause an impact and the answer is we don't know but I would just say, you know, it's clear that we all have our biases and we deal with our uncertainty with regard to the Future.
Implementing our biases it's very hard to get away from that and I worry I'm not a dreamer. I'm not a Pollyanna. I'm not the person who's oh, they'll find a solution I worry and so, you know, I worry that there will be some negative effects that I can't predict or or describe or quantify. And so that would among other things tend to cause me to implement some
caution.
And you're right that the FED chairman j-pal to his exact his quote was when it comes to lending. We're not going to run out of ammunition, which was right in the Wall Street Journal that's on March 30th. What what form might that caution take or perhaps more specifically if we look at the FED buying all sorts of things that historically it would not necessarily be associated with
Purchasing junk bonds distressed debt Etc. How does how does that affect your playbook and how you think about crowded versus uncrowded
opportunities? Sure. So many things in that question require an answer first. Let me say that I think every investor has to make a choice. They have to balance offense and defense just like just like a soccer team the coach fields to play.
Against another team, you know, you have to have the players on the field who in totality can both defend their goal and attacked the other side's goal. So your portfolio for the investor has to strike a balance between trying to make money and trying to avoid losing money at the same time.
And the way I hope it out Tim is to say that every investor faces to risks every day the risk of losing money, which is obvious and the risk of missing opportunity, which is a little more subtle. Now, you can eliminate either risk if you are willing to totally surrender to the other risk.
So I can if you want to if you want to eliminate the risk of losing money, you can put all your money into key bills.
And then you will miss all the opportunities.
Or if you want to make sure you don't miss any opportunities you can make sure that all your Investments are aggressive and you know, there are no t-bills or cash in which case you're exposed heavily to the possibility of losing money. So most people compromise most people say well, I don't want to lose a lot of money but on the other hand, I don't want to miss all the opportunities. So I'm going to strike a balance between offense and defense. That's what we all have to do if we're not crazy and
So the question is, how do you strike that balance today?
And Oaktree, my firm in recent years has been concerned about the market and about the fact that we thought that it was exposed to significant uncertainties and risks, although we didn't enumerate pandemic that asset prices were high.
That Prospect of returns were low because interest rates in the environment have been so low for so long and because a lot of investors were engaging in Risky behavior in order to make a good return in a low return world. So you put all that together and we thought that made the world a risky low return place in which one should emphasize defense over offense.
And when we did we adopted a manager of move forward, but with caution and that has guided us now. We are cautious investors. So when I say with caution, I mean more than usual and that's what we've done.
Next question. How do you implement defense and there are basically three ways that an investor can add to defense in his portfolio or her portfolio. The first the obvious one is you sell some assets and you go to cash in part or in whole now, this is very hard to do because this is Black or White wrong or right and
Really? Is it right to be overwhelming and cash and on the rare occasions when it's right. Most people can't find those occasions. So going to cash is problematic. And by the way, if you go to cache and you're wrong and you you miss good performance in the market for a couple of years, you know, the individual investor will Rue the day and the professional investor might be out of work. So cash is tough. The next thing you can do is you can go into more.
Or defensive asset classes. We know what they are more bonds rather than stocks.
Larger companies rather than small value rather than growth stable rather than cyclical u.s. Rather than foreign developed World rather than emerging and that, you know, there are many many ways to increase the defensiveness of your asset allocation. And then the third form of going defensive doesn't even require you to disturb your asset allocation.
It shifted everything you want to do in investing can be done in a more aggressive or more defensive way. So you might say well I have 40 percent of my portfolio in stocks and I want to keep it that way but you can provide more defensive stocks or you can put your money with a more defensive manager or you can put your money in a mutual fund which has a record of not making so much money in the up years, but
Money can the down years. So there are three ways to be defensive or cash take a more defensive asset allocation or use more defensive tactics and we've been doing the latter our asset allocation is assigned our clients give us money and they say here put this in this or put this in that for the most part. We don't choose our asset allocation. But what we've been doing is in recent years, we have been fully invested and so we participated as the market.
Rogue but with a portfolio that we think was more defensive than most and so we came into this virus episode with a higher quality more defensive portfolio and that stood us quite well in the in the first quarter, but frankly with the risks on the table and a lot of Securities now cheaper than they used to be
And a lot of risky Behavior now discouraged. I don't think one has to be as defensive as we were so we have shifted the balance in our portfolios move more on to offense to take advantage
and if you're looking towards offense capitalizing on some of your historic strengths, what does the how does the FED purchasing all?
It's of asset classes that it might not normally purchase affect how you look at those opportunities if
that was part of your original question, which I forgot but well, you know as should be clear, you know, we are specialists in non gilt-edged Ted gilt-edged is an old-fashioned term non-investment grade death speculative grade that and you know, that means high yield bonds.
Leveraged loans convertible bonds which I mentioned before, you know Emerging Market debt. Lots of lots of let's say less than Stellar quality debt and usually in a crisis like this that stuff would be hurt more than most which meant that we could pick it up cheaper than most perhaps our one of our Flagship strategies is investing in distressed debt the debt of companies that are
Either bankrupt in default or highly likely to be in the opinion of the market and we've been investing in distressed debt since 1988. My partner Bruce cars join me in 87. He's been running these portfolios since then and in the 32 years that were five periods when they were very high defaults among high yield bonds a lot of distress and when we got to
Take advantage of very good opportunities. And those were 1990-91 2001 O2 and O8 those were crisis years and in the crises the low quality risky debt tended to melt down and we tended to get great buying opportunities. So your question is well, what does it mean that the FED is involving itself in these areas? And the answer is its if we wish they'd go away. No because because it
You know historically in Negative X and this is something we haven't discussed much, but maybe we should most people get discouraged most people shrink to the sidelines. And you know, when when these things would Cascade down in price, we would be able to buy them very cheaply If the Fed comes in and Buys in those markets, then it makes our lives more difficult because things don't fall the way they otherwise would have we don't get the
Organs, we otherwise would have
when you look Bobby know maybe I want to ask if you think the FED is truly with infinite ammo. I mean, I don't know if they have the veep's bandwidth to participate super widely indefinitely in high volume, but possibly they do this is way outside of my area of expertise. So it's a bit above my pay grade. But where would you thinking probabilistically? Where would you
you how do you look at the possible outcomes and probabilities that this type of spending continues for a long period of
time I think that they the fed and the treasury want to soften the impact on America and its economy and I think they're going to continue to spend until the economy is can take over for itself I think one way.
Think of this Tim is that you know many times if a patient has a serious disease, they'll put the patients into a coma so that they can treat the disease and while the patients in the coma they keep him on life support and then when the patient is Fitzy's have been healed the patient can be brought back and the life support can be removed. So the disease is the virus in order to fight the virus.
Iris, we had to close businesses freeze economic activity and help people stay home. So stores movies and hotels Airlines and concerts and sports all stopped cold and that's putting the economy into a coma and we have 26 million people who have filed for unemployment insurance in the last five weeks.
And we are expecting a decline of GDP in the second quarter here of well, most people say 20 to 30 percent which would make it the worst quarter in history via order of magnitude. So they have to keep it on life support until they can bring the economy back and the life support is all this injection from the fed and the treasury and they're going to continue
continue it until they're highly confident that they're out of the woods. They're not going to take a chance and say well if we let suspend it now and see if the economy can pick up they're going to wait until the economy is operating with some strength and growing from this depressed base before they withdraw it I'm confident that
what are the as someone who's I've never taken an economics class, which is not something I brag about. It's quite
Thing source of embarrassment for me. But what are the markers or metrics that they would look to to assess whether the patient can be taken off of life support.
Well, I unemployment is usually the best fish short-term indicator. You know, remember that unemployment reach 10% in the global financial crisis, and it was the down to five percent five five two, five and a half is
Has generally been considered something like a structural level of unemployment. In other words. There are people there are some people who can't get a job because they're in qualify. There are people who can't get a job because they can't pass a drug test. There are people who just quit a job. There are people in the process of looking for a job. So transactional friction Ali most people assume that five five ish percent is structural and the Obama Administration over 8 years did get the unemployment rate. I
Lead down to five percent by 2016 and then Trump Administration came in and continued very aggressive stimulus pro-business environment reduction of Regulation and the unemployment got down to three and a half. So it's a barometer of how the economy is doing and I would think that the they'll want well, it's you see it's not going to be all or nothing. It's not
They not going to spend spend spend and then stop they'll slack off the term. We use it in the discipline. You never studied economics in his taper and they'll taper but you know, I think that they'll support the economy certainly aggressively until the unemployment rate gets into single digits and perhaps until it gets into mid-single digits. Then of course, they'll look at GDP will you know,
GDP has been growing at around two percent and Donald Trump has been trying to say he'll get it to three or four but GDP will be deceptive because you know, it's going to be so horrible in the second quarter of twenty that it's going to be easy to show growth in the second quarter of 21, but we have to take that growth with a grain of salt and I think what they look for is for the GDP to be getting close back to the track that
it was on if this virus hadn't developed your you've
listed some questions that debt Traders on the oak tree team just in quaglia if I'm saying that correctly San Mateo that are related to behavioral change more than anything else. So assuming that quarantine is lifted. When will you take your first flight? How will you react when the person next to you starts coughing what has to happen to make you feel it's safe to send your child back to school.
One of my favorites is the when you go to a dinner with your wife husband friend family. Do you want to be served by a waiter or waitress wearing masks and gloves? So these are behavioral questions and you seem to be a connoisseur of questions and I want to bring up a quote that also was featured in the you can't predict. You can prepare memo which was what the wise man does in the beginning the fool does in the end and these might not be
Totally Apples to Apples, but what types of questions are the Y's asking these days are any particular types of thinking or questions present in those people you would you admire as good thinkers right now?
Well the, you know the future the outlook for the economy has been mostly described as a v sharp down in the
First and second quarter of 2020 maybe some lingering effects in the third and then sharp pop and you know, there's a lot of debate about how sharp the recovery will be. You know, I think I personally think we're going to come back gradually. I think that people who have a choice are not going to rush back to work one of the questions that you didn't ask for that memo. Tim was was
mine for a New Yorker. When are you going to get back on the subway?
Right? That's a great
question and and be in close contact with all those other people and you know taking an airplane flight is a big deal because you know, they want you to be 6 feet away from the next person and I the way I calculated it at best you could have one person for every nine seats and they're not going to do that. Of course, they'll fill the seats and know that people wearing masks.
But you know, I think that people who have a choice are going to wait a while before they get on a full airplane. Another question, of course is assuming that there is a reopening and assuming that the that the virus hasn't been killed off and we don't have yet of each vaccine will people engage in their previous activities. I think that people who have a choice will not rush.
Back and then you I read about one state that that passed a rule that restaurants can reopen but only one out of every four cables can be occupied but also an article yesterday. We said that a business which is operating at a low level of its capacity is probably not more profitable than it was when it was closed.
Yeah. That's what if you have time that's definitely true here in Austin a lot of restaurants are opting not to open.
With a 25 percent capacity,
right? Right. So, you know, the expectation that we're going to come back is probably right, but nobody knows the pace.
And these are important questions to ask but you know one of these days I assume I assume we'll have a vaccine it's not easy to produce 330 million Doses and get them into distribution for if we need to like you do for shingles. For example, the 660 million Doses and you know, these are massive issues and they don't happen overnight and
And of course, you know, we have large numbers of people who don't you know, only only half of Americans I think get flu shots. We're flu shots are flu kills a lot, you know kills a lot of Americans I think flu probably averages 42 50 thousand deaths a year and yet only half the people get the shots will people get the shots and you know, it is is an anti vaccine cohort in America and will they get them and
So forth and if they don't what is it imply for everybody else. So I just think that it's you know, when as what I say about these unprecedented event Tim is it if you haven't seen something happened in the past, you can't say, you know how it's going to turn out.
and we have to we have to allow windage now a warrior like me
allows for the possibility of bad outcomes an optimist wants to make sure he contemplates the possibility of good outcomes surprising good outcomes and so that's why we haven't differences of opinion that's a that's why you know we have markets in which people can can eat and express their opinions through price
it's just a few more questions Howard I
Hit all the time today. The the question of informational filtering is one. I'd like to chat about for a second what I mean by that is how do you choose amongst a deluge of possible books articles sources of information what you read these days for instance or a better question is probably what are some of the higher signal sources of information books people anything that you're paying attention to these days.
Well, you know get there.
There are no I don't think there are useful topical books on the subject of this episode yet. It's to know we have to you know, always leave you are thinking how we think about propositions and odds and that's and probabilities and how we think about making decisions under uncertainty and these kinds of things and you've talked about some of those, you know, I think that we all have to take in a lot of
Input primarily through the newspapers and of course, we have to be aware of the biases of the newspapers when I was a boy. I used to believe that if we zoom in the newspaper was true, but you know newspapers have Slants to and then importantly we have to be very aware of our own Slants and
You know we can too we have what's called confirmation bias and we all tend to read the things we agree with more than the things we disagree with and believe the things that support are biased position more than the things that though it into question. And this is a this is a great challenge so we should try to read broadly we should try to read.
from the newspaper whose editorial slant we agree with and the one we disagree with we should try to appreciate all the input but I think it's this is a great Challenge and you know, if you if you if you read broadly and everybody on the on the internet every every brokerage and securities house is putting out its own covid report nowadays and
You see such disparate information. By the way, there are probably I don't know. We've been even talking to me about questions that ATM there are probably a hundred or two hundred three hundred questions that bear on the future and nobody can take them all into account. So which ones do you think about? Well number one your selection of the questions to ponder will be shaped by your bias.
hi cuz you can't do them all so you know it's a terribly challenging thing and
I think a lot about bias and the let's go back to what I said earlier quoting Professor lip Stitch of Harvard facts and knowledge he's guesses you know when I read Layman investment people talking about the likely medical course of
Developments, you know I say well where is their expertise but you know, everybody has an opinion and you can't argue you're right, but on the other hand, you can't say well I am not an expert. So I'm not going to have an opinion and you know, it's very very difficult to decide these things in a uniquely uncertain environment like today's
well Howard II
really appreciate you carving out time for the conversation. I think that we could cover a thousand additional topics, but I'll just ask one more or maybe two more and that is what would you hope people would think more about or what aren't people paying enough attention to in your mind is does anything does anything occur to
you? Well, just in the narrow field of investing, you know, most people want to
you're somebody like me say by yourself but it's a much more nuanced question than that you know you are the person who wants advice has to think for themselves do I want to put a lot of emphasis on making sure I don't lose money or do I want to make a lot of put a lot of emphasis on making sure that I take advantage of the opportunities and those two things work in opposite directions as I
Lane before so the the person has to decide for themselves how they feel about these things now they can they can ask for advice but that everybody has to decide this on a personal basis and the other thing is whether you should buy or sell has a lot to do with number one your current position so I mentioned that that oak tree
Became more aggressive because we had been very defensive. If you have been aggressive until now that doesn't mean you should necessarily become even more aggressive. So, you know, what's becoming increasing aggressiveness for us. They not be right for everybody. And then the other thing is
the investor has to ask themselves and be tough on themselves to spec out what their time frame is because you know, if you say to me, how are we going to look in five years? I think in five years were going to be okay. And so, you know, if you you said to me I'm going to put on a position today and I'm not going to look at for five years. I say, okay. Well, then you you should have a pretty normal non-defensive investment posture if you're going to look.
Every day and if you're going to get upset if the market goes down, then you might want to have a little more defensiveness than normal. So again, the the same answer is not right for everybody because it depends on their ability to take a long-term view rather than short and their ability to live with the agita of short-term ups and downs.
Well, thank you very much Howard people can
Can find you on Twitter at Howard marks book certainly. I'll link to your writing to your book and everything else in the show notes, including any of the memos and references that we made in this conversation. Is there anything else you would like to add or anything else? You would like to suggest that people take a look
at know, you know Kim's good to link to all the memos. There's a 30 years worth in the archive. I don't
Capital.com it's free so you can The Price is Right and and you can look at what I was what I was thinking at various points in time in the last 30 years I want to thank you Tim for inquiring about these things and asking such good questions these are difficult topics they're even difficult to frame the questions and I want to apologize for the length of my answers but there are never easy answers and that's especially true today
a so thank you for having me with
you my pleasure Howard and to everybody listening as always everything will be in the show notes teamed up log forward slash podcast and until next time thanks for tuning it hey guys this is Tim again just a few more things before you take off number one this is five bullet Friday do you want to get a short email for me and would you enjoy getting a short email for me every Friday that provides a little morsel of fun before the weekend and
I bought Friday's a very short email where I share the coolest things I've found or that I've been pondering over the week that could include favorite new albums that have discovered. It could include gizmos and gadgets and all sorts of weird shit that I've somehow dug up in the the world of the esoteric as I do. It could include favorite articles that I've read and that I've shared with my close friends for instance, and it's very short. It's just a little tiny bite of goodness before you
Head off for the weekend. So if you want to receive that check it out. Just go to four hour workweek.com. That's 4-Hour workweek.com all spelled out and just drop in your email and you'll get the very next one. And if you sign up I hope you enjoy it. This episode is brought to you by LinkedIn jobs. Now more than ever businesses are grappling with incredibly challenging times a lot of things in life and business are changing and we're all adapting to new priorities while it does take time to adjust LinkedIn believes that it's also possible to find and
The opportunities in times of turbulence in times of change whether you're looking to hire now for critical role or thinking about needs you might have in the future LinkedIn jobs can help LinkedIn is an active Community with more than six hundred and seventy five million members worldwide LinkedIn screens candidates for the hard and soft skills are looking for while putting your job in front of candidates looking for job opportunities that match exactly what you have to offer with LinkedIn. You can hire the right person quickly when you need them.
And if you need to hire for healthcare or essential Services, you can post your jobs for free right now when it's time to find and hire that right person LinkedIn is here to help just visit linkedin.com Tim again. That's linkedin.com attempt to post a job now terms and conditions apply.
